The Bullish Indian market and the aftermath...

The Indian Sensex (Index) has risen by more than 2.5 times in the last 2 years from 5,000 levels to 12,500+. However the last few days have seen a very steep correction with the market correcting by more than 25%. To witness a lower circuit (selling freeze) on the Index is rare.

While, many factors have been used to explain this rise in the Index, I have a few other reasons for this rise in the indices apart from the Chidambaram game:

The rising Media Reporting
In the past few months there has been a general rise in Business/ stock market reporting in the Media. While CNBC was earlier one of the only channels of late we had a number of channels like CNBC Awaaz,  NDTV profit, Zee business  etc. also the Leading English dailies have increased the proportion of business reporting from just one page earlier. The New launch DNA has a complete business supplement with its daily and Hindustan times is to come out with a new business paper. Programs like Saas, Bahu and Sensex speak about the hype of stock market themselves.

Trading is just a click away
While, previously before the demat of shares was a tedious task involving a lot of paper work and transfer of certificates, which kept it away from the reach of common man and too difficult a process for the young graduates/just-joined-job youth. However, with the launch of a number of e-portals of the likes of Icicidirect, kotakstreet, India bulls, Share khan etc. it has taken investing to each and everybody. The latest advertisement of one click IPO investing is a proof of the ease. While, the ease of investing is positive, it lures a lot of people who would have otherwise not invested and who do not understand “What a share is?”.
The ubiquitous mobile has made the stock market quotes not confined to the Bloomberg or the Television screen but brought it into the hands of the investors. Airtel (Bharti) had recently launched Portfolio Tracker on the mobile, in association with BSE.

It is pouring Mutual funds
The recent Bull run has seen a record of sorts in both new MF schemes launch and money raised. This has been easy due to the great results posted by the mutual fund schemes due to the vertical rise in Indices. However, all money invested come with a disclaimer that “Past performance does not guarantee future Results”.

Reliance Mutual Fund recently created a record of sort by mobilizing 5,700 crores. This beat the earlier record of Rest. 4,472 crore raised by UTI Equity, formerly UTI MasterGain during the 1992 stock market boom. Prior to Reliance SBI MF’s blue chip fund had collected 2,800 Crores.

Most of the MFs have been at a loss to garner such huge collections, at high index levels were forced to invest a) regulation does not allow them to hold cash for long b) they are themselves not sure where are the markets headed, and they rather invest and later blame the index levels in case they fall c) no MF manager got thrown out for investing in the bluest of blue chips, in spite of earning low returns and therefore all the money garnered was deployed in the indices resulting in further propping of stock levels.

Every investor looks for Absolute profits, it does not matter if the MF outperformed or underperformed the Index. While, MF managers were keen enough to ask investors to tone down   their expectations of returns, nobody stopped from raising more cash (as it is part of their performance bonus). Lack of proper alignment of incentives can cause a lot of irrational behavior.

Investment strategists have run out of ideas…..
Also, recently most of the MF houses have been in close competition in vying for the Numero Uno position in terms of funds under investment. There have been at least 2-3 new schemes launched by each of the fund houses. The proposed investment strategies for investment of theses schemes have been anything from Lifestyle, Rural, Blue Chip, Contra, Infrastructure, Services, Commodities, Special situations and Media & Entertainment.    


Retail Brokerage on the rise……
With stock market Euphoria  cometh the interest in Brokerage firms. The Indian capital markets are seeing enhanced interest in participating not only in the stock boom but the business of brokerage which is known to benefit the most during periods of Euphoria. While, India Bulls, Indiainfoline, & Emkay share & stock brokers have recently tapped the Indian markets for capital, there are a few others in like Multi-commodity exchange and Steel city securities.
Some of the brokerages have also seen private equity interest with private equity firms picking up stakes in SSKI and Motilal Oswal. While these are definite signs of the rising euphoria nobody captures this phenomenon better than Adam Smith in his book “The Money game” which I have quoted in my earlier blog.  

The Analyst race…
The Euphoria in the markets has been followed by mushrooming of brokerage houses, analysts and investment advisors with names ranging from ABC to xyz advisors. The new analysts with experience of 2days-2 years are falling head over heels in making obscene projections and obscene targets, with the only way to get heard on the street being different. The behavior of the big brokerages also has been similar. Off late have seen research reports with DCF projection for 20 years, Terminal growth rates of 6-8% and P/E multiples of 50’s and 100’s.  
A case in point is the retail industry where the metrics for valuation of Enterprise value per square foot has surpassed the financials, with no comparison how much money the square feet makes. The land banks of the real estate companies are another weird case. I am yet to see a report where  the blue chips like SBI, BHEL, Indian Oil  and BPCL will be valued for their land banks and not for their business, but I am sure somebody is thinking about it.

The Chidambaram Game

The Indian Sensex (Index) has risen by more than 2.5 times in the last 2 years from 5,000 levels to 12,500+. However the last few days have seen a very steep correction with the market correcting by more than 25%. To witness a lower circuit (selling freeze) on the Index is rare.

While, many factors have been used to explain this rise in the Index, one of them is the :

The Chidambaram FACTOR

While the election of the Congress led Government was followed by the May 17th . 2004 black Monday crash, the markets recovered soon after. The recovery in the markets soon followed with the realization that ManMohan Singh is to become the PM, the man behind the liberalization in 1991 and Chidambaram’s the man who delivered the Dream budget in 1997.
Chidambaram as the finance Minister is looked upon as a Markets friendly FM, who has been very active in coming to the rescue of stock markets every time they corrected or drifted downwards be it for clarification regarding CBDT (taxes on FII), Securities transaction tax (STT), or doling out statements about who is buying and who is not.

History of Chidambaram’s comment on the Sensex (Source: bechalis.blogspot.com)

Finance Minister P. Chidambaram at commenting on various milestones (in both directions) of Sensex.[December 2004] Sensex at 6000 : "I don't react. As long as the Sensex is driven by the fundamentals of the economy, I am very happy."
[July 2005] Sensex at 7000 : “If the Sensex crosses 8000, then I think that I would be concerned."[September 2005] Sensex at 8000: "We are looking at the price-earnings (PE) ratio (of Sensex and Nifty). At this level, they look comfortable."
[December 2005] Sensex at 9000 : "I expect the Sensex to rise with investor and business confidence rising. However, SEBI and I watch the movement carefully to see if there is any manipulation...... My impression is that mutual funds are quite active in the markets, meaning thereby that small investors are putting their money in the mutual funds.
[March 2006] Sensex down by 216: "It's a correction. It's nothing."
[May 15, 2006] Sensex down by 463 : "I will put it as a correction provoked by reasons which are quite understandable. All metal prices are down and there is some impact of cement prices... and increase in US Fed rate. All markets are doing the same."
[May 18 2006] Sensex down by 600, and on its way to register a fall of 826 : "Everyday movement in the stock markets does not require a comment."


The same FM had commented a few years earlier that “He was more concerned with what happens in Khan Market (in Delhi) than in the Bombay stock market”  meaning that the concerns of ordinary Indians were more important than the rumblings in  Dalal Street.


The latest comment by Chidambaram “saying every market swing didn’t deserve a comment?” is a proof his regular intervention to keep the market sentiments high. There is a growing confidence among the investors that the BIG Boss, market savvy  Chidambaram will not let the markets tank, leading to the euphoria.

Before the Euphoria which finally led to the stock market crash in 2000, the then Fed chairman Alan Greenspan also was viewed as a savior of the stock market. Greenspan had made public his fears that a drop in the markets could impair the real economy which was interpreted as that the FED is in favor of the stock market buoyancy and would protect it from tanking. Alan Greenspan also stood true to his words by rescuing the Stock markets from the  Russian debt crisis in 1998, bailing out LTCM ( Hedge fund debacle) and  the Y2K crisis which led to the 2000 Euphoria.  (Irrational exuberance. Robert Shiller)

It was expected, only nobody knew when

We are all at a wonderful party, and by the rules of the game we know at some point in time the Black horsemen will burst through the great terrace doors to cut down the revelers; those who leave early may be saved, but the music and wines are so seductive that we do not want to leave, but we do ask, “What time is it? What time is it?” Only none of the clock have any hands.

               The Money game, Adam Smith.

“Mr. Market is there to serve you, not to guide you…and it will be disastrous if you fall under his influence” – WB


The markets in India finally crack/correct/slide/fall. Whatever you may say.


I think this will bring in some research and level headedness among investors. While everybody was concerned, nobody wanted to miss the bus. One did not like to be scoffed by friends who were moving happily for so many days.

So, do not be Fooled by randomness.